[Yang Nak-gyu's Defence Club] Defense Companies Cornered... Struggling Without an Escape Route

[Asia Economy Yang Nak-gyu Reporter] As the government continues to tread carefully regarding North Korea and domestic and international market conditions worsen, the domestic defense industry is struggling without finding an escape route.

According to the Korea Institute for Industrial Economics and Trade on the 16th, the sales of the top 10 defense companies, which produce 70% of domestic defense products, reached a record high of 11.38 trillion won in 2016. However, after the current government took office, sales dropped by 1 trillion won to 10.38 trillion won in 2018. The operating profit margin is even more serious. LIG Nex1, the leader in the domestic defense industry, had an operating profit margin of 1.62% in 2018. Although it achieved sales of 1.4775 trillion won, its operating profit was only 24 billion won. Considering that the average operating profit margin of domestic manufacturing is 7.3%, this is the worst profitability.

The industry agrees that the domestic defense market's stagnation is due to the influence of inter-Korean relations. The scale of outdoor field training has been drastically reduced, and the increase in command post exercises (CPX), which are wargames conducted through computer simulations, has lowered the usage rate of live ammunition. The number of firing ranges for launching shells has also decreased. The Songjiho firing range in Goseong, Gangwon Province, under the Army's 8th Corps, has been virtually closed according to the inter-Korean military agreement.

The impact on defense companies like Poongsan is significant. Until the second quarter of last year, the defense sector's single sales amounted to 243 billion won, about 70 billion won less than the first half of the previous year. The suspension and reduction of the ROK-US joint military exercises and ongoing peace policies have dealt a direct blow.

As the military delays weapon procurement, the willingness of defense companies to conduct research and development (R&D) is also waning. LIG Nex1 plans to invest in the development of guided ammunition systems and stealth technology demonstrators, while Poongsan intends to invest in observation-capable ammunition and drone-type intelligent munitions. However, considering inter-Korean relations, the military has shifted all projects?including the Radiation Detector-II for North Korea's nuclear and missile threats, unmanned aerial vehicles for reconnaissance, long-range artillery interception systems, and support sets for weapons of mass destruction (WMD) elimination operations?to mid- and long-term projects. Hanwha Corporation aims to secure orders this year for ballistic missile interceptors for the Long-Range Surface-to-Air Missile (LSAM), but the project's progress remains uncertain. Korea Aerospace Industries (KAI) is also waiting for the military to proceed with a contract worth 940 billion won for tactical basic trainer aircraft.

Competition in the narrow domestic market is fierce. The KDDX, known as the "mini Aegis destroyer" (6,000 tons), is the first destroyer to be equipped with a combat system developed purely with domestic technology. Hanwha Systems and LIG Nex1 are engaged in a two-way battle to secure the contract for this combat system, but the company that fails to win the order will inevitably suffer significant damage.

As the domestic market turns into the worst possible market, defense companies are turning their attention to export markets. Korea Aerospace Industries (KAI) is focusing all efforts on exporting the FA-50 to Malaysia. Additionally, Hanwha Defense is pursuing the export of the Biho Combined Air Defense System to India, and Hyundai Rotem is advancing a next-generation tank joint project with Poland.

However, the perceived temperature of the government's export policy among defense companies is below freezing. There are calls to revise related regulations such as liquidated damages (penalties for delayed delivery) and the defense cost compensation system, which rather worsen the profitability of defense companies, to enhance their competitiveness. Hanwha Corporation is facing the risk of paying hundreds of billions of won in liquidated damages due to the failure of the 155mm extended-range ammunition project and an explosion accident at its Daejeon factory last year.

An Young-soo, head of the Defense Industry Center at the Korea Institute for Industrial Economics and Trade, said, "Domestically, the debarment system and excessive audit systems need to be changed, and defense exports should be promoted in a cross-ministerial cooperative form including both civilian and military sectors in line with the Blue House's defense export strategy. Customized export strategies by country must also be established."

This content was produced with the assistance of AI translation services.